As the restaurant industry experiences a stabilizing macro environment and improved costs this year so far, pressure from continued, “substantial” permitting delays caused The Cheesecake Factory to shift some anticipated restaurant openings into the first quarter of 2024.
The company only managed to open two locations in the third quarter in Birkdale, North Carolina, and Estero, Florida. As a result, the brand now projects a total of 16 new restaurant openings this year, including five Cheesecake Factory stores, four North Italia restaurants, and as many as seven Fox Restaurant Concepts (FRC) locations, which includes one Flower Child restaurant.
“Consistent with the trends seen throughout the industry, we continue to experience challenges beyond our control, particularly with permitting delays, pushing some of our opening dates to late December,” CEO and chairman David Overton shared during the company’s Q3 earnings call. “Despite the ongoing permitting challenges, we continue to accelerate our development activity and build our pipeline.”
The company reported higher pre-opening costs of $6.7 million in the quarter compared to $4.3 million during Q3 of last year.
In the midst of continued headwinds, The Cheesecake Factory is choosing to level up its category-leading bakery production. A new facility will open in Charlestown, Indiana, which will be the company’s third bakery site. The 37-acre facility will produce cheesecakes and signature bakery products for restaurants and other retailers, plus provide efficient distribution.
“Our vertically integrated bakery is a distinct competitive advantage with our desserts, driving the strong affinity for The Cheesecake Factory brand as illustrated by our industry-leading dessert sales,” Overton said.
The company hopes its investment in this third bakery production facility will support future growth and enhance long-term profitability. Yet, CFO Matt Clark noted the site is still in the early stages of development.
Third-quarter revenues rose 5.9 percent over last year to $830 million, led by same-store sales growth of 2.4 percent at The Cheesecake Factory restaurants versus the prior year.
“Our performance amidst the softening sales environment is a testament to the resilient consumer demand for the distinct, high-quality dining experiences we provide our guests,” Overton said.
An increased focus on consistent execution and operations had positive results across many areas, Cheesecake Factory president David Gordon noted—including improved guest satisfaction and third-party reviews.
A primary catalyst for the brand’s improved consistent performance is its heightened emphasis on training. “Since the start of the year, our operating team’s training and development have been firmly centered on the fundamentals of the restaurant industry, great food, great service, and great ambience, as well as on reinforcing the operational standards that Cheesecake Factory has been built on,” Gordon said.
As a result, The Cheesecake Factory’s retention rates have surpassed pre-pandemic levels, he added, and staff engagement scores have “improved significantly from a year ago.”
The Cheesecake Factory’s off-premises sales in the third quarter mixed 21 percent, just below Q2 levels, which Gordon attributed to historical seasonality of lower off-premises sales during the summer months.
Now in the fifth month following the national launch of Cheesecake Rewards on June 1, the company did not anticipate seeing any measurable impacts to sales for the first year or so. That’s because of the brand’s “very deliberate approach as we expand the program,” Gordon told investors. Though, “we continue to be encouraged by the level of member activity and engagement we are seeing,” he added, and early demand and member satisfaction scores are exceeding internal expectations—“reinforcing our belief that we are on the right path.”
The Cheesecake Factory ended Q3 with 213 company-owned stores in the U.S.
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Meanwhile, North Italia sales totaled $62.4 million during Q3, supported by a rise in same-store sales of 8 percent (a 28 percent increase over 2019). In an effort to boost margins, the company rolled out a menu price increase of 3.7 percent in October. The 33-unit, casual-dining concept is based in Alabama, Arizona, California, Colorado, Washington, D.C., Florida, Georgia, Kansas, North Carolina, Nevada, Pennsylvania, Texas, Tennessee, and Virginia.
“There’s a lot more whitespace to work with to operate a little bit more contemporary and benefit from the scale, but still have people believe it’s their local Italian concept,” Clark said during the Piper Sandler Growth Frontiers Conference, as FSR previously reported. “The margin profile looks very strong. The alcohol is 25-30 percent—that definitely supports it. At the same time, that margin includes making all the pasta fresh in-house every day and all the culinary aspects that we bring. So it’s a pretty good balance.”
With roughly 30 units, Flower Child—a high-end, fast casual with a healthy halo, as described by Gordon—is scheduled to be fully integrated with The Cheesecake Factory by the end of the year. During the third quarter, Flower Child sales totaled $32.2 million, up 11 percent from the same period last year. Sales per operating week were $80,000, and external bakery sales were $17.4 million.
As the company enters Q4, Clark expects a continuation of trends of higher pre-opening expenses, commodity inflation of low single digits as its broad market basket continues to stabilize, and a “meaningful improvement” in sales levels versus 2019.
“With regard to development, as David stated earlier, our expectations for 2024 are to take another measurable step towards our objective of 7 percent annual unit growth,” Clark said during the company’s Q3 earnings call. “Given the dynamic environment we continue to face, we are planning to provide additional details on our next earnings call in February.”
In early October, the Cheesecake Factory also announced an extension to its exclusive partnership with third-party delivery platform DoorDash through 2026, including the company’s growth brands North Italia and Flower Child. The partnership has allowed Cheesecake factory to expand services to underserved markets like suburban areas.
“We have made significant financial and operational progress over the past four quarters coming out of not only the pandemic, but unprecedented supply chain and labor challenges and the highest level of inflation in 50 years,” Clark added. “Our efforts have resulted in a solid position from which we can continue our trajectory of sales growth and margin expansion moving forward.”
